Process involved to terminate mortgage insurance. You all have been so helpful I am getting great advice so last question I promise.

Asked by Kristi Maris, Colorado Thu Dec 27, 2012

My wife and I are young (25) have excellent credit and qualified for a loan with a 3.5% interest rate. We are closing on our home in the next couple of weeks. We are putting down 3.5% on a short sale and unfortunately we are having to pay mortgage insurance. It is our goal to fix the house up a bit and then in the next 2 years have the home appraised and hopefully it will appraise for MUCH more than we are paying. We are getting the steal of the century on this home. My question is - if we have the home appraised in a couple of years and it comes in high enough to make the equity we have in the home over 20% do we have to refinance our home to get the mortgage insurance dropped or can we just ask our lender to waive the mortgage insurance due to the substantial increase in property value. Again, we are young and do not fully understand this entire mortgage process. We know that we do not want to be making someones house payment for them which is why we are

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Jon Roberts’ answer
Jon Roberts, Agent, Denver, CO
Thu Dec 27, 2012
I'm going to answer this question from my own personal experience. I purchased my first home in Denver with a 3.5% Down FHA loan. Are you are using FHA? I made improvements and bought in a very good location that appreciated about 20% over several year. I thought with that appreciated Loan To Value that I could ask/apply for the removal of Mortgage Insurance. What I learned is that with FHA Loans, the LTV (Loan To Value) will always be calculated by your Purchase Price. An appraisal implying 20% equity will not do you any good. I had to wait till my loan was paid down to 78% (that is the FHA regulation for automatic removal of PMI)! You can early pay interest to get it down faster, but the % will be based on Purchase Price. So that is my experience based on my FHA loan. I would suggest checking with your lender. Best of luck!
1 vote
everyone can learn from other fellow realtors. thank you for the post.
Flag Fri Dec 28, 2012
Rich Homer, Agent, NAPLES, FL
Thu Jan 17, 2013
Best next action is to ask a local Mortgage Broker by clicking "Find a Pro" in the main menu at the top of this website.
0 votes
Cary Trusty, Home Buyer, Indianapolis, IN
Thu Jan 17, 2013

I think you are in a similar situation here that I am in. I think the advice given is all nice and accurate but many are missing the point that you have given (and have probably researched). You do have an FHA loan and the PMI can't be removed til a 78% LTV AND at least 5 years of payments (which I'm sure you knew already as well). However, with your great "deal" and continued improvements, you believe the house will have 20% equity within the next two years based on a new appraisal.

If that were to be true, to remove the PMI, you would refinance to a conventional loan. On a conventional loan refinance, down payments aren't required, and the 20% equity you are looking for is based on the APPRAISED value and not the sales price (as it is with FHA loans). Using this method, you would remove the PMI (from FHA Loan) and could potentially avoid the MIP (Conventional Loan) as long as you have the 20% equity.

The bigger questions here are the following:

1) On the refinance to conventional, will the closing costs paid offset the PMI you would be paying if you stayed with your FHA loan. If it can be made up in a few years, I would say yes. The MIP would be non-existant from the beginning and there are 1000s of threads on homeowners not being able to remove FHA PMI at even 65% LTV as lenders continue to find ways to keep the PMI on the note.

2) Although the equity seems to be there, will you actually get it on the appraisal. The big issue here is most appraisals will consider comparables in the neighborhood. This could be the axe that kills it all as there might not be enough comparable houses in the neighborhood to give an accurate value of your current home.

I'm not a lender, just an educated borrow. I'll be closing on a short sale of $170k where the home tax assesment was $256K in 2012. This doesn't always equal the appraisal. I'll be using a 203K loan to put up to $35K in renovations PLUS up to $8k in energy efficient appliances. After the 203K (a FHA loan) has met its seasonal period (the time the loan needs to exist before it can be refinanced), I'll look at a conventional refinance to remove my PMI as well.

All of this is well documented (for 203k but would essentially apply to standard FHA loans if you have the equity) in a very informative youtube video. Look for 203k 2 step process by Brent Kluge.

I hope this was helpful and good luck!
0 votes
Robert McGui…, Agent, Denver, CO
Fri Dec 28, 2012

Good to see you here again. More good answers below. When you do the remodeling and updating you might consider doing a conventional loan with a 15 year mortgage if that fits into your budget. You will be able to take care of paying off your home quicker and addressing the MIP at the same time. Please know that many new buyers think they are purchasing he home of their dreams for a lifetime. But the fact is that most homeowners move (up or down) in 5-7 years. You are making some great moves at a young age. Please let us know how things go with your short sale closing. Again, best of success to you with your endeavors.

Robert McGuire ASR
Your Castle Real Estate
Direct - 303-669-1246
0 votes
Bob Gordon, Agent, Boulder, CO
Fri Dec 28, 2012
Hello Kristi - first things first. Be patient with your short sale. These transactions can be very lengthy. While you stand to get the deal of the century, first you need the lien holders to approve. I blogged about the process at… .As for the PMI, you may be required to refinance your loan in the future to eliminate the mortgage insurance.
0 votes
, ,
Fri Dec 28, 2012
Hi Kristi,

Serena & Jon are both right but they missed a couple of important things.

1) FHA requires the MI until you've paid your balance down to 78% or for 5 years, whichever is longer. What's important about the distinction is that on a normal 30 year amortization it will take anywhere from 7 to 10 years to reach that 75% threshold if you just make the normal payments and never pay extra towards your principle.

2) FHA is pushing a couple of changes including increasing the monthly MI and requiring it for the life of the loan.

With your excellent credit ratings you should look into a conventional loan or even a MCM which is another type of conventional loan. The main reasons for this is you'll save the the upfront mortgage insurance premium and the monthly MI will be less.

Please feel free to contact me for more information or help.

John Burke
Senior Mortgage Banker
Peoples Bank & Trust Co.
0 votes
Steve Kirk, , Colorado
Fri Dec 28, 2012
Kristi and Family, You are wise to get in the game and purchase your 1st home-congratulations! Jon's answer below is accurate. It sounds like you have an FHA loan and the truth is, not only must you pay MIP (mortgage insurance) for at least 5 years, but it would not be removed until your principal balance is paid down to 78% of the ORIGINAL sales price. If you pay additional principal along with your regular payment each month you can speed up this process; or, of course, you could refinance to a conventional loan once you have the equity. Also, check with your tax advisor to see if you can deduct the cost of the mortgage insurance along with the interest paid on the loan. Good luck and enjoy your home!!
0 votes
James Ponzi, Agent, Denver, CO
Thu Dec 27, 2012
Sounds like a good plan, but as someone mentioned below, you have to make 5 years of scheduled payments to be eligible to remove mortgage insurance on an FHA loan. You'll have to consider your options as well as rates and fees at the time of the refinance to make sure it makes sense. Congratulation on getting a "steal of the century", those are becoming more and more rare. Enjoy your new home!
0 votes
Dan Tabit, Agent, Issaquah, WA
Thu Dec 27, 2012
Ask your lender if you can do pre-paid MI. This is more cash up front, which you may not have, but it is a one time fee that you never have to worry about getting rid of. Depending on your upgrades and the market coming back favorably is uncertain. The rules the lender has in place to drop it may require you to have 25% equity before they are required from stopping the monthly MI.
You can read over the paperwork from the lender, or ask them for the rules; they would be your best source for the most reliable information.
0 votes
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